American Connector Company

OPERATIONS MANAGEMENT CASE ANALYSIS

Group 5 | Section C

Barsha Bulbul | 1711166

Nitin R Patil | 1711195
Prakashkumar Ahir | 1711155
Sanket Fulpatil | 1711205
Shreyas Raman | 1711208
Sumeet S Kasture | 1711212
 1. HOW SERIOUS IS THE T HREAT TO AMERICAN CO NNECTOR COMPANY?
The threat of DJC’s entry into the US connector industry is high. The following are the key reasons
which explain the high threat:
1. Supply side economies of scale-
The product design of DJC was focused on the goal of continuous and reliable operations. The design
of most connectors was standardized, thus manufacturing less variations of connectors. This helped
DJC to economize on raw materials. It resulted in spreading out of the fixed cost over larger volumes
of similar connectors. Also, limited number of variations reduced the cost of shorter production runs.
2. Cost of Raw Materials-
Comparison of the various cost for DJC and American Connector Company is shown in the following
table:
Cost of Raw Materials (1991)
DJC @ Kawasaki vs. DJC @ USA

Item DJC@ Kawasaki Index DJC@USA

Raw Material, Product 12.13 0.6 7.28

Raw Material, 2.76 0.6 1.66

Packaging

Total Raw Material 14.89 8.94

The raw material cost for the proposed plant in United States has significant cost advantages.
The table shown below compares the cost of raw materials of DJC (USA) with American Connector
Company Sunnyvale plant.
Cost of Raw Materials (1991)
ACC @ Sunnyvale vs. DJC @ USA
Item ACC@ Sunnyvale DJC@USA

Raw Material, Product 9.39 7.28

Raw Material, Packaging 2.10 1.66

Total Raw Material 11.49 8.94

From the above table, total raw material cost for DJC in US is lower than ACC. The raw material cost of
DJC at US is approximately 23% lower than ACC. DJC can get significant cost advantage and can threaten
the existing players especially ACC, by charging lower prices to customers and thus posing a possible price
war.
3. Total manufacturing cost-
If DJC uses manufacturing processes like Kawasaki, Japan plant then total cost for the US plant can be
calculated using exhibit 7 and exhibit 8.
DJC Vs American Connector
Cost of Goods Sold
(dollars per 1000 units)

Item ACC@ Sunnyvale DJC@ Kawasaki Index DJC @ US

9.39 12.13 0.6 7.28
Raw Material,
Product
2.10 2.76 0.6 1.66
Raw Material,
Packaging
- 3.02 1.1 3.32
Labor, Direct
- 0.75 1.1 0.83
Labor, Indirect
10.30
Total Labor
0.8 1.40 0.8 1.12
Electricity
5.10 1.80 1.0 1.8
Depreciation
6.10 4.24 1.0 4.24
Other
33.79 26.10 20.25
Total
Table 1

DJC has significant cost advantage over ACC. Except electricity, DJC has lower cost/1000 units for every
other cost head. Total manufacturing cost for DJC is $20.25/1000 units as compared to $33.79 of ACC
Sunnyvale plant. The total cost for the DJC plant will be approximately 40% lower than ACC Sunnyvale
plant.

4. Low WIP Inventory-

DJC offers standardized products as against ACC which supplies more customized products. More
customization of products results in more work in progress (WIP) inventory for ACC Sunnyvale plant. It
holds WIP inventory of 56 days while DJC has 38 days of WIP inventory. It results in less storage and
handling costs compared to the ACC. Higher degree of customization leads to smaller output per square
feet of 10.9 (‘000 units) at ACC Sunnyvale plant compared to 15.1 (‘000 units) at DJC Kawasaki.

5. Technological Advantages-
DJC uses high degree of automation and relies on inhouse technology development. Each production line
at DJC is straight which reduces the handling costs. Additionally, one worker can simultaneously work on
two production lines. It helps to reduce total labor costs. Total labor force at DJC is 94 compared to 396
of ACC.
However, there are few factors which indicate DJC won’t pose much threat to ACC in the short run.
1. ACC produces highly customized products which are quite relevant in US market. DJC produces less
varieties of products. Also, DJC supplies connectors with pins plated with tin instead of gold, which is
acceptable in Japanese market. But it might not be acceptable to US customers, hence to supply
connectors with gold plated pins, overall cost goes up. Since number of competitors are very high,
the US customers have very high bargaining power. Hence, DJC cannot rely on tin plated pins to
compete in the US market.
2. If DJC decides not to build a plant in US and import from Japan, then it results in higher lead time
than competitors. In such case, ACC has the advantage of shorter lead time.

From the above key parameters, the threat of entry of DJC is high for ACC if it plans to build a plant
immediately in US.
2.HOW BIG ARE THE CO ST DIFFERENCES BETWE EN DJC’S PLANT AND
AMERICAN CONNECTOR’S SUNNYVALE PLANT? CO NSIDER BOTH DJC’S
PERFORMANCE IN KAWASAKI PLANT AND ITS POTENTIAL IN UNITED STATES.
From Table 1, the cost difference between DJC’s Kawasaki plant and ACC Sunnyvale plant is 7.69
dollars/thousand units. Similarly, the difference between DJC’s US plant and ACC Sunnyvale plant is
13.549 dollars/thousand units.
Except for low material costs, all other costs are higher for ACC than for DJC. So, we can say that DJC can
manufacture the connectors in US at about 60% of the costs of ACC.
Following table compares the various costs incurred by DJC and ACC. We have assumed that the total
production in a year as 700 million units for following calculations.
Cost Comparison between DJC and ACC
DJC/Kawasaki ACC/Sunnyvale

Annual Production (million units) 700 420

Annual Production Capacity (million 800 600

units)

Capacity Utilization 87.50% 70%

Total operating hours 330*24 = 7920 hrs 50*24*5 = 6000 hrs

Daily Production (in '000 units) (700*10^6) / (330*1000) (420*10^6) / (250*1000)

= 2121.21 = 1680

Direct Labor Cost ($/hr) (3.02*2121.21) / (64*8)

= 12.51

Indirect Labor Cost ($/hr) (0.75*2121.21) / (30*8)

= 6.63

Total Labor Cost ($/hr) 12.51 + 6.63 = 19.14 (10.3*1680) / (396*8) =

5.46

Annual Labor Cost ($ mn) (12.51*7920*64/3) + (5.46*6000*396/3) =

(6.63*7920*30/3) = 2.64 4.32

Annual Material Cost ($ mn) 14.89*700*1000 = 10.42 11.49*700*1000 = 8.04

Since the DJC plant was operated on a continuous basis as well as slow growth in demand of ACC explains
the greater capacity utilization of DJC (87.5%) as compared to ACC (70%).
Due to reduced number of workers in the production activities as well as less number of manpower
allocated for inventory management explains the reduction in annual labor costs of DJC in comparison
to ACC.
Other cost advantages have been elaborated more in Question 1 and 3.
3.WHAT ACCOUNTS FOR THESE DIFFERENCES? HOW MUCH OF THE
DIFFERENCES ARE INHE RENT IN THE WAY EACH OF THE TWO COMPANIES
COMPETE? HOW MUCH IS STRICTLY DUE TO DIFFERENCES IN EFFICIEN CIES OF
THE OPERATIONS?
DJC’s Kawasaki plant was started with the vision of making it highly automated, continuously operating
plant. While that of ACC’s Sunnyvale plant was expanded to fulfill the forecasted demand within certain
flexibility. The differences between these two plants can be implicated from multiple quantitative and
qualitative factors as follows:
Quantitative factors:
Factors DJC ACC Implications

Connector 15.1 10.9 DJC utilized its available plant place more
output/square efficiently
feet Utilization

Connector 7.45 1.06 DJC was successful in getting more output from
output/employee its employees reducing per unit cost
utilization

Fixed asset 75.40% 30.20% DJC’s asset utilization was much more than that
utilization of ACC

SKUs 640 4500 Reduced cost and complexity associated with

shorter production runs for DJC

Yield 99.99% 55% initially, Non standardized products resulted in lower

98% after a yield for ACC
year

Production 800 mn 600 mn Lower fixed per unit cost for DJC because of
capacity higher continuous production

Finished goods 56 days 38 days Higher inventory holding cost for DJC but
inventory smooth flow of materials

Lead time 2 days 10 days for Relatively few resources to inventory control
regular item
and 2-3
weeks for
non-regular

Annual cost per $29000 $40000 Emphasis on in house production of complex

mold/year molds leads to lower overall cost

Raw material 5 days 10.8 days Relatively small warehouse and fewer resources
inventory in handling raw materials for DJC

Annual operation 330 250 days Higher production days

days
Qualitative factors:
• Process changeovers- DJC’s vision of continuous operating plant helped them avoiding
start-up and shut-down costs while ACC’s frequent change overs with 1.5-2 days lasting
processes increased these costs
• Material costs- DJC economize its cost of raw materials by using much cheaper tin plated
pins instead of gold plated ones for connectors. It restricted connectors’ use in low power
applications but was most cost effective.
• Process technology- While DJC focused on automating its production processes it had
given equal importance on the activities required to be automated. They also studied
worker movements & motions and raw material quality involved to find out the ways
where process can be made more efficient.
• Quality control – To improve the quality, DJC followed the approach of quality check
starting from molding of the components later on to improving process inspection system
and reducing plant’s waste. They had the vision of keeping customers complaints not
more than 1 per million units of output. On the contrary, ACC was doing quality check
using older manual method causing 26000 faults per million.
4.WHAT SHOULD A MERICAN CONNECTOR ’S MANAGEMENT AT SUNNYVALE DO?
American Connector should consider the points mentioned below for enhancing their
productivity
• They should opt for better quality control systems to reduce ppm levels and manual
inspection.
• The management should look over improvising the compactness of connectors to gain
some competitive advantage.
• They should reduce depending upon outside technology and invest into research and
development to develop in-house machinery and have a technological advantage over the
competitors.
• There should be a quality inspection done at intermediate levels instead of an end-
product inspection.
• Lead time control should be done to have an easier order management and lesser
inventory pile up.
• Fixed asset utilization should be increased, and operational cost should be decreased by
controlling the costs of start-up and shut down.
• The available space utilization should be increased by going for a change in layout.